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Last Updated: Jan 31st, 2007 - 10:58:43 |
Cigarette Companies Going Smokeless?
Mar 15, 2006, 16:03
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CHICAGO - Tobacco analysts are suggesting that the makers of Marlboro and Camel cigarettes could soon be offering smokeless tobacco as a strategy to counteract sagging U.S. cigarette sales volume, according to a Reuters report.Altria Group Inc.'s Philip Morris USA and Reynolds American Inc. could both enter the smokeless tobacco market soon, either through an acquisition or with their own new product, analysts said in the report."Our trade contacts indicate Reynolds American has already developed a product and will enter the market with Camel, possibly in conjunction with the Daytona 500 in mid-February," Bonnie Herzog, analyst at Citigroup Investment Research, said last week in a research note. The idea of cigarette makers entering the smokeless market has long been rumored, with UST Inc., which makes Skoal and Copenhagen, or Conwood Sales Co., which makes Kodiak and Grizzly, seen as possible acquisition targets, Reuters reported. The reason is simple -- U.S. consumption of cigarettes has fallen almost every year since hitting a peak of 640 billion cigarettes in 1981, according to the U.S. Department of Agriculture. Consumption fell 2.6 percent in 2005, to 378 billion cigarettes, the USDA said. Cigarette demand has been hit by restrictions on smoking in public places, increased consumer awareness of the dangers of smoking and higher prices. Prices have risen because of taxes and increases taken by cigarette makers to help pay billions of dollars to U.S. states as part of a 1998 legal settlement. "If you're not able to cover the [settlement] payments with price increases, it's going to start dipping into profitability," Gregg Warren, food and tobacco analyst at Morningstar Inc., told Reuters. Meanwhile, smokeless tobacco consumption is growing. Volume for the sector rose 4.5 percent in 2005, though much of that growth was driven by lower-priced products, Warren said in the report. The smokeless tobacco sector "doesn't have the same dangerous legal and health cloud hanging over it" as cigarettes, one investment banker, who specializes in the consumer products sector, told Reuters. "It may not be viewed as a 'healthy' product, but it's not viewed as a deadly product like cigarettes." The chief executives of Altria and Reynolds American were both asked about entering the smokeless tobacco market during calls to field questions about their fourth-quarter earnings. Both declined to answer specifically, but their answers left open a move into that market, according to the report. "It is clear that smokeless is a growing category," Susan Ivey, chairman and CEO of Reynolds American, which makes brands such as Camel and Kool, said in the report. "I would not want to comment on how we would or would not get engaged in that until we have something concrete." Meanwhile, Altria chairman and CEO Louis Camilleri said last week that the company's Philip Morris USA unit, which makes the top-selling Marlboro brands, is interested in "adjacent" tobacco businesses. "You can clearly expect a lot of activity in the coming months," he told Reuters, but did not provide more detail.Analysts and bankers said it makes more sense for the companies to buy smokeless tobacco companies rather than start their own businesses since the tobacco used is a different strain and processed differently from cigarette tobacco. "It's a different tobacco, a different manufacturing process, a different audience. Just buy it - and get a built-in, loyal customer base - rather than trying to reinvent the wheel," a second investment banker, who declined to be named, told Reuters. A spokesman for UST declined comment on the possibility of the company being acquired. H Group Holding Inc., the holding company for Conwood, could not be reached for comment, reported Reuters.
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